Bahamian-style trust defence

By Colin Callender, partner, Michael Scott, partner, and Julian Malins, consultant, Callenders & Co.

There are two types of trust. The first is where the settlor sets up a trust with his own money or other assets. Such trusts, if the deed is correctly drawn and the settlor’s intentions well expressed, should cause few, if any, legal problems.

The second type of trust is where the money or other assets are (arguably) not beneficially the settlor’s and are claimed or are claimable by some other party – perhaps a divorcing spouse, creditors, victims of fraud or other crime, or by the settlor’s home state itself.

Of course, transactional lawyers and banks and professional trustees would never knowingly set up the second kind of trust. But only that kind of trust is of real interest to litigators, who, remember, are neither moral nor legal judges and must take their instructions from the trustees.

Let’s look at this from the settlor’s point of view and assume that our dubious settlor has managed to get through all the due diligence, ‘know your customer’ regulations, and other checks upon his probity and the source of his money, which are required by money laundering legislation. He has now got his trust in place and one or more Bahamian international business companies (owned by the trust) holding his bank accounts and other assets. At that point there is suddenly a black cloud in his clear blue sky. Somebody is after ‘his” (as he sees it) money and assets. Also assume that he has made his first and worst mistake (this always amazes the authors): he has left a traceable trail for money or assets in his, or his company’s, hands to his Bahamian trust. Assume, too, that he has made his second mistake: namely, he has placed significant assets outside the Bahamas, in unsympathetic jurisdictions. So, the letter arrives on his Nassau lawyer’s desk. It reads:

“We act for (usually an institution or person of integrity)… and we want our money back. Enclosed is a copy of a Writ and a worldwide asset freezing injunction granted by the Hon. Mr Justice Offshore Trust Terminator, which we have already served upon.” Then follows a list of defendants, some of whom even you as the lawyer have never heard of.

What can be done here for that best of all clients (we should make clear that we don’t have any such clients), namely the rich crook?

The first question is: is the trust a Bahamian domiciled trust? If so, it is assured of all the benefits of the Trusts (Choice of Governing Law) Act of 1989, which provides that all matters affecting the Bahamian trust (including dispositions under the trust) are construed or interpreted in accordance with Bahamian law.

Second, how old is the trust? Of course, the older the trust, the better its prospects of survival. Establishing fraud, for example, and the ‘tracing’ (a legal process) of assets gets much more difficult over time. Sometimes there are very helpful limitation laws – such as The Fraudulent Dispositions Act 1991, which protects transfers of assets after two years unless the transfer has been challenged within that time.

The next key question is, of course, where are the assets? It is surprising how often Bahamian trusts (of the second variety) have assets, usually real property but often also bank accounts, in such places as London, UK. The differences between London and Nassau are as follows.

First, assets in London will be picked up by the London courts under English law which, although more reluctant to pierce the corporate veil than it used to be, is very favourable to trust busting if there is any real case of fraud or criminality. Happily Bahamian trusts do not suffer from the dubious reputation (in London) ‘enjoyed’ by other offshore Caribbean jurisdictions and can, therefore, defend its assets on reasonably equal terms.

Second, London (and all European Union courts) will give worldwide asset-freezing orders to support substantive litigation occurring in other jurisdictions. The Bahamian courts will not do that. To obtain a freezing injunction in Nassau there has to be a real action going on there as well.

Third, unless all or at least most of the trust assets are in London, the rule must be to leave that jurisdiction well alone. Take part in litigation in London and the Bahamian courts will enforce the result and there will be very damaging discovery orders (which are difficult to get in Nassau because of the restrictive provisions of the Trustee Act 1998). It is much better to let judgment go in default in London and fight only in Nassau. But if the settlor has been sensible and the assets are in Nassau or in friendly jurisdictions (almost anywhere but Europe or North America) then there is a fair chance of upholding the trust or at least settling the litigation and preserving some of the assets. Trust and insolvency litigation are the cutting-edge areas of the law, involving almost every type of circumstance, factual and legal, in each case. Look at, for example, the worldwide attempts by the BCCI liquidators (in which the authors did battle on behalf of one of the BCCI targets) to ‘recover’ assets in Nassau and worldwide. Given a choice, we would not do anything else. Of course, it is just as stimulating to act for the claimants, but space prevents more discussion and we have to keep some trade secrets!